Sunday, June 23, 2013

Vaughn on the Early History of the Austrian School

Karen I. Vaughn’s book Austrian Economics in America: The Migration of a Tradition (Cambridge and New York, 1994) provides an accessible history of the early Austrian school.

I summarise that early history in what follows. Carl Menger (1840–1921) was the founder of the school, and Eugen von Böhm-Bawerk (1851–1914) and Friedrich von Wieser (1851–1926) were the two most important followers of Menger, although they were not Menger’s students, but colleagues.

The early Austrians are usually divided into two generations, as follows:

Carl Menger made his mark as an economist with his book Grundsätze der Volkswirtschaftslehre (Principles of Economics; 1871). This was intended to be a four-part series on economics, but the other three volumes were never written (Vaughn 1994: 27). A posthumous second and expanded edition of the Grundsätze der Volkswirtschaftslehre was published by his son, but this has never been translated into English (Vaughn 1994: 12, n. 2). Even more surprising is that Menger refused to allow reprintings of his Grundsätze to be published during his lifetime, and many economists did not read his treatise, and his ideas were mainly transmitted by his followers (Vaughn 1994: 12–13).

Menger’s main contribution to economics was the development of a subjective value and diminishing marginal utility theory (Vaughn 1994: 13), along with other neoclassical founders such as William Stanley Jevons and Leon Walras. To this extent, his project, like that of Jevons and Walras, was to refute the Classical labour theory of value.

Other contributions were more original, such as Menger’s theory of higher and lower orders of goods, which was later developed in Austrian capital theory.

From the 1970s, there was a reassessment of Menger’s originality and relation to neoclassical theory (Hicks and Weber 1973; Lachmann 1978; Jaffé 1976). Some would see Menger as an “incomplete neoclassical” (Vaughn 1994: 17–19). Indeed, Menger’s notion of an “economic price” is analogous to the neoclassical concept of an “equilibrium price,” even though Menger thought that it was doubtful that “economic prices” will be seen in the real world (Vaughn 1994: 29).

Menger’s views on economic methodology set him at loggerheads with the German Historical School. Menger held that there are laws of economics (not in the same category as scientific laws) but that these cannot be refuted by pointing to contrary empirical evidence (Vaughn 1994: 28). Indeed, by the time of the Methodenstreit (Menger’s debate with Gustav Schmoller), Menger was associated with an extreme a priorist theorising (Vaughn 1994: 32).

Eugen von Böhm-Bawerk (1851–1914) developed a time preference conception of interest and an extended theory of capital. Strangely, Menger is reported to have said that Böhm-Bawerk’s theory of capital and interest was “one of the greatest errors ever committed” (Vaughn 1994: 35, quoted from Schumpeter).

What is most interesting of all is that by the 1920s,

“[m]ost economists, including the Austrians themselves, believed that there was no longer any discernibly different Austrian school … All of the major contributions of the Austrians were either easily absorbed into the mainstream of neoclassical thought or served as topics for family feuds.” (Vaughn 1994: 37).

Clearly, then, the controversies and developments by which Austrians distinguished themselves from mainstream neoclassical theorists happened at a later period.

1 comment:

I wouldn't say that Joseph Schumpeter became a "neoclassical economist". Nor would I say that he was ever a disciple of the Austrian School of Economics, despite having Eugen von Bohm-Bawerk as a teacher.

I would say that he was too independent-minded to be part of any school of economic thought (he once said something along the lines of, "Fish swim in schools.", in a rather dismissive manner). This would partly-explain why there is no school of economic thought that takes after his surname.

However, I would say that he could be put into a general category of the classical tradition at large. This would be because despite his important observations on "regular irregularity" (something that would require the further maturity of mathematics, as the mathematics used in Joseph Schumpeter's lifetime had yet to mature and be dispersed among a wider knowledge base to allow for the mathematical modeling of his observations, which arguably can only be partially formalised by non-linear dynamical systems), he didn't seem to see the need for a great paradigm shift.